Peter Costello is facing another bitter disappointment. Despite his brave hopes, Australia’s prices are now rising sharply again. The nation’s already stretched home-buyers must prepare for at least one more rate rise before this year’s Federal election.
This became clear when the Australian Bureau of Statistics (ABS) released its Consumer Price Index figures for the June quarter. The Bureau says Australia’s prices leapt by 1.2 per cent over the three months to the end of June, taking the nation’s inflation rate over 12 months to 2.1 per cent. This was a rapid acceleration in the quarterly rate. Australia’s prices had risen by just 0.1 per cent in the March quarter.
Predictably, Costello blamed the price of ‘volatile items’ like fuel, fruit and vegetables for this distressing development.
That is an old favourite with politicians.
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Thanks to Fiona Katauskas |
Gough Whitlam’s first Treasurer, Frank Crean, told a business dinner in Canberra 33 years ago that Australia’s then gathering inflation was due mostly to a rapid rise in potato prices. ‘And most of you look as if you could do with fewer potatoes,’ he told his well fed audience. Gough’s wife, Margaret, also famously asked at the time what all the ‘hoo-ha’ over inflation was about. People should just shop around for the best prices, she said.
Peter Costello now reflects their innocence. For months he has been telling anyone who will listen that Australia’s inflation, which went well above the Reserve Bank’s top target of 3 per cent late last year, would ease as banana prices gradually fell.
Costello’s inclusion of fuel among those so-called ‘volatile’ items is particularly surprising. It is straight from the Pollyanna songbook. With some analysts already warning that world oil prices could hit or even pass $US100 a barrel in the months ahead, Australia’s prices could well be in for another sharp rise before the end of this year.
But why all the fuss? After all, at 2.1 per cent, Australia’s inflation is still well within the Reserve Bank’s well-publicised 2-3 per cent target rate, isn’t it?
No, not exactly.
The Bank’s board does not focus on the ABS’s raw figures when it meets on the first Tuesday of each month to review rates. Instead, it looks hard at something it calls its ‘trimmed mean’ figures.
The Bank’s economists do a bit of averaging, here and there, to produce those figures. They also exclude some one-off items, so that its board can get a better look at what was once called Australia’s underlying inflation rate. For the first time this week, the Bank allowed the ABS to publish these figures, along with the Bureau’s own calculations.
The Bank’s figures make grim reading for Australian families who are already struggling to meet their mortgage repayments each month. Those ‘trimmed mean’ figures confirmed that there has been a sharp rise in Australia’s prices over recent months.
Adjusting their books in this way, the Bank’s economists concluded that prices leapt by 0.9 per cent in the June quarter. They also concluded that on this trimmed mean basis Australia’s underlying inflation rate over the past year was 2.7 per cent.
These figures alone would not necessarily produce another rate rise. It is the direction that prices are going that worries the Bank most. And that, right now, is sharply upwards.
The Bank also constantly reminds us that it tries to estimate where Australia’s inflation rate would be in 12 to 18 months time if it did not act.
All this points directly to at least one more rate rise in the months ahead. The Bank warned the Government quite bluntly earlier this year that it would raise rates in the pre-election period if it believed that to be necessary.
John Howard will be furious about the latest price hike. He owes his job, as much as anything, to his cleverly crafted promise that interest rates would always be lower under a Coalition Government than they would be under a Labor Government. Since Howard made that promise before the 2004 elections, however, the Reserve Bank ¾ which acts independently on such matters ¾ has raised interest rates no less than four times. A fifth rate rise in the near future would severely damage Howard’s credibility.
The political implications of all this can hardly be overstated. About one third of Australian families have home loans. A similar number, mostly empty nesters, own their homes outright. The rest are renters.
The first group is heavily concentrated in outer suburbs, often in the biggest houses they could afford, bought when interest rates were much lower than they are now. These marginal electorates have huge clout when it comes to choosing or sacking governments.
So even if John Howard could pull back Kevin Rudd’s presently commanding lead in the opinion polls, he could still face defeat if his ‘battlers’ desert him.
They well might.
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